In recent years there have been significant changes in the administration of the Federal student loan programs. Under the Ensuring Continued Access to Student Loans Act (ECASLA) of 2008, the USDE acquired, and became responsible for the servicing of, more than 25 million Federal Family Education Loan (FFEL) Program loans for almost 12 million borrowers with an aggregate outstanding balance of more than $110 billion.
In 2010, in accordance with SAFRA legislation, part of the Health Care and Education Reconciliation Act of 2010, on or after July 1, 2010 all Federal student loans were required to be made under the Direct Loan Program, with no new loan originations under the FFEL Program.
As a result of these events, the incidence of borrowers with loans held by multiple lenders and serviced by more than one servicer has increased.
Many borrowers, for example, have one or more Title IV student loans serviced by a FFEL Program lender/servicer and, at the same time, one or more loans serviced by a Federal loan servicer (split-servicing).
This is particularly the case for the cohorts of borrowers who are included in the three-year Cohort Default Rate (CDR) calculations. This is because these cohorts include many borrowers who took out loans both before and after the Department’s acquisition of FFEL Program loans under ECASLA and the transition to 100% direct lending.
The USDE has made a concerted effort to–where possible–assign all of a borrower’s Direct Loans and Department-held FFEL Program loans to the same Federal loan servicer. Moreover, loan servicers have been directed to take steps to ensure that borrowers understand the process for making payments on multiple loans and that all of a borrower’s Direct Loans and Department-held FFEL Program loans receive the benefit of forbearances and deferments for which borrowers are eligible. However, such a coordinated treatment of a borrower’s loans has not always been possible when a borrower has both Direct Loans and FFEL Program loans not held and serviced by the Department. This is not always possible in the FFEL Program given the multiplicity of loan ownership and servicing.
For these reasons, the USDE has adjusted how it calculates CDRs for any institution that otherwise would have been subject to potential loss of eligibility with the release of the FY 2011 rates.
The adjustment to the calculation excludes from the CDR numerator certain borrowers who defaulted on a loan but who had one or more other Direct or FFEL Program loans in a repayment, deferment, or forbearance status for at least 60 consecutive days and that did not default during the applicable CDR monitoring period. The 60 consecutive days must have been between the date the loan on which the borrower defaulted entered repayment and the date when the borrower defaulted on that loan. A borrower was only excluded from a CDR numerator if there were one or more non-defaulted loans that met the above criteria for each of a borrower’s defaulted loans.
As noted, USDE made the adjustments described above to all three of the most recent official three-year official CDRs (FY 2009, FY2010, FY2011) for any institution that otherwise would have been subject to potential loss of eligibility with the release of the FY 2011 CDRs.
In some cases, these adjustments resulted in an institution not being subject to a potential loss of eligibility to participate in the Direct Loan Program and, in some cases, also the Federal Pell Grant Program. Note that, as is the case with certain successful CDR appeals, the borrowers’ defaulted loan remains in its current status for collection and other purposes.
The impact of split-servicing for borrowers will diminish over time because, while FFEL loans will be outstanding for many years, the loans of succeeding CDR cohorts of borrowers entering repayment will increasingly be comprised solely of direct loans serviced by only one Federal loan servicer.